Turkey: Diversification prizes

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Private pension asset growth will lead to opportunities for global custodians, according to Iain Morse

Turkey may not join the EU soon but it already has a larger economy by GDP than Greece or Belgium or even Switzerland. The pension system and financial markets are being overhauled. Foreign banks and financial services companies are coming into the market. All is set for change on the back of a relatively buoyant economy, where GDP growth has been between 0.2% and 3.6% per quarter since the start of 2010.

One of the latest deals involved Allianz and HSBC – a 10-year bancassurance distribution agreement where HSBC will distribute Allianz insurance and pension products across a number of countries in the region. The tie-up in Turkey is the most important of these. Allianz is paying an up-front €23m fee to HSBC for the Turkish distribution agreement alone.

The Kuwaiti Burgan Bank is also interested in Turkey and has just purchased Eurobank Tekfen, formely part of the Greek Eurobank Group. The sale will strengthen Burgan’s balance sheet and includes both an equity trading division – EFG Istanbul Equities, rebranded as Burgan Securities – and a leasing division now named Burgan Leasing. Burgan’s expansion gives an insight into the fast-developing universe of emerging economy banks; it already operates throughout the Gulf and North Africa. In Turkey, it provides investment management, administration and custody services for its own range of mutual funds, and on a discretionary basis to third-party investors. Like other Turkish asset managers, the funds invest predominantly in domestic equities and bonds, including euro-denominated bonds.

Burgan is following the traditional bancassurance model, and custody is dealt with in-house. The same model is widespread in Turkey. Global custodians have small footprints here – HSBC and Deutsche Bank are prominent, BNP Paribas and several others offer global custody to Turkish clients but the global/local tie-ups so common in the EU hardly exist.

Part of the reason for this may be a still prolix system of regulation. The capital markets law, banking law and a further body of capital market regulations codify the system, as Hasan Akicioglu, a partner at law firm GSIMeridian in Istanbul, points out. Behind these sit two regulators – the Capital Markets Board (CMB) and the Banking Regulation and Supervision Board.

From an institutional perspective, the Takasbank or Central Securities Depository (CSD), and the Central Registry Agency (CRA) are statutory entities at the core of the system sitting along- side the Istanbul Stock Exchange (ISE). Any member of the ISE automatically qualifies as a clearing participant of Takasbank. Other possible members include mutual funds, pension funds and asset managers which may separately employ a custodian bank.

Indeed, Takasbank started as part of the ISE before being spun out as a separate legal entity in 1996. It is a non-deposit-taking bank authorised by the CMB to act as a clearing and settlement facility for the ISE across all the financial instruments, equities, bonds, derivatives, exchange traded funds and mutual funds, which originate from the ISE or, in the case of derivatives, from the Turkish Derivatives Exchange (Turkdex).

The CSD and CRA are surrounded by banks and brokerage companies that satisfy Turkish regulatory requirements to act as client-facing custodians. The CRA monitors and maintains data relating to securities custodied by Takasbank and the regulated custodians, and acts as the central securities depository for all ISE-traded dematerialised securities. The CRA runs an in-house system, the central dematerialised system, providing a service interface to the ISE, Takasbank, and custodians. Certificates of traded securities are held in a dematerialsed form in its system.

Custodian banks and brokers hold main accounts with Takasbank but within this structure must keep separate sub-accounts for each of their clients. Each ultimate investor is therefore known to Takasbank and assigned a unique client number, and Takasbank can therefore monitor trading. Clearing and settlement via Takasbank is effected on a delivery versus payment (DVP) basis with a T+2 settlement cycle for equities, T+3 for international settlements with bonds and bills settled on T+0.

Non-Turkish banks with Turkish subsidiaries that are members of the ISE include Credit Agricole, Citibank, Credit Suisse, Deutsche Bank, HSBC, ING Bank, Merrill Lynch, Morgan Stanley, Standard Chartered, SocGen, Royal Bank of Scotland and Unicredit. Most if not all of these banks trade the Turkish market for non-Turkish institutional clients and for their proprietary funds/desks, interfacing with Takasbank via their global custody systems. The ISE, currently owned by the Turkish government, is also in active co-operation with Deutsche Börse since 2011. This tie-up may result in Deutsche Börse being the front runner to purchase the ISE if and when it is privatised, a project long-mooted in Istanbul. Meanwhile, the two exchanges have co-operated on a range of projects, which include knowledge and skill transfer to the ISE. Last September, the ISE launched two new Turkish equity indices with Wiener Börse covering the 20 most traded shares on ISE and the Turkish banking sector.

Reform of the Turkish pension system is expected to rapidly increase the value of pension funds in Turkey. Some 17 companies currently manage assets worth TRY22.4bn (€9.53bn) on behalf of 3.5m pension savers. Pension contracts come in three forms – non-contributory, group individual and individual, but all share a generic defined contribution structure with full transferability. Around 50% of all assets held are TRY-denominated bond funds invested in government and corporate debt. Cash and so called flexible funds, investing into equities and bonds, account for much of the remainder. Anadolu Hayat Emekillik (AHE), a Turkish insurance company and subsidiary of Isbank, itself established by Kemal Ataturk in the 1920s, is the largest provider by assets and number of contracts. Isbank effects custody services for AHE – the same vertically integrated model found among the other Turkish pension companies.

This cosy world is set for radical change. The Turkish government is redirecting a small fraction of tax raised to pay social security into private pension contracts, with the intention of increasing these with consideration of contribution matching on a more ambitious scale. In response, some 120,000 new members opened contracts in January alone. The government is also considering plans for ‘open architecture’ modifications to the current contracts with up to 30% of funds available through each contract to be managed by a third-party manager via the contract provider.

The government has also promised to review and reduce current charging structures on pension plans and other retail savings products as a means of encouraging long-term saving. This will stimulate further interest from global and major European banks and asset managers, creating new opportunities for global custodians.